"Suddenly, IBM was the cool company on the block," says James Berry, then the WebSphere product manager at IBM and now vice president of strategy at open-source consulting firm Collab.Net. "The dot-com phenomenon was running on Linux and Apache, and guess what? IBM had a product that ran on Linux and Apache. For the first time, we were the lead dog rather than the rear dog."

Meanwhile, in Böblingen, Germany, 28-year-old Boas Betzler was working on IBM's System 390 mainframe technology at the office and on Linux at home. One day in 1998, he suggested to a colleague that it might be fun to have Linux running on S/390. His managers liked the idea and so did executives in the U.S. They brought Betzler and his wife to IBM's Poughkeepsie, N.Y., headquarters in mid-1999 to complete his work.

By that time the open-source mind-set had penetrated to the highest reaches of the organization. In late 1998 at a meeting in Toronto, a group of Linux devotees within IBM had submitted a so-called Earthquake Petition to IBM's Academy of Technology, the company's brain trust of 280 top scientists. The petition described Linux as a groundbreaking technological opportunity too important to miss. "We said Linux was an important phenomenon and we had to get started," says Dan Frye, director of IBM's Linux Technology Center.

The Academy concurred. In January 1999, Frye and several colleagues met in Research Triangle Park, N.C., with open-source experts Tim O'Reilly, president of O'Reilly & Associates (dossier), and Richard Stallman, founder of the Free Software Foundation.

The visitors quickly realized that IBM was not the staid Big Blue of old. "I remember being amazed to discover that the person hosting me didn't wear a suit and tie," recalls Stallman.

The changes, in a sense, take IBM back to its roots. "For IBM, open source is a return to an industry they understand better," says O'Reilly. "Some of [IBM's] operating systems were originally user-developed. So in a way, this is a real comfortable arena for them."

IBM is hoping to combine the flexibility and low cost of open-source software with its strengths in hardware and services. It can offer its Global Services customers, for example, a cheaper alternative to licensed software - which should mean more consulting contracts and more hardware sales. Many enterprise customers would prefer to have an operating system that runs across all their hardware platforms and is easy to modify. Plus, open source allows IBM to reduce its investment in software development.

The strategy is already paying off. In December, Scandinavian telecom Telia said it would replace 70 Sun servers with an IBM machine capable of running multiple versions of Linux. And Shell Oil (dossier) recently announced plans to create a supercomputer by installing more than 1,000 IBM servers running Linux.

But revelations don't come without risks. Though IBM executives downplay the threat Linux poses to AIX - arguing that the former is targeted at low-end applications and the latter at the high end - Linux will certainly add functionality over time, eventually converging with AIX to become one standard Unix-based operating system. While that could erode IBM's AIX business, it will also enable programmers to spend their time building new applications instead of porting applications between variants of Unix.

The blurring of lines between IBM's proprietary programs and Linux "won't happen in the near future," says Dick Sullivan, a VP in IBM's software group. "But if it did, that would be good for the industry and good for us."